4. Financial Statements and Notes

Overview of the Industry

The 7,357 FDIC-insured commercial banks and savings institutions that filed financial results at year-end 2011 reported net income of $119.5 billion for the year, an increase of $34.0 billion compared with full year 2010. This is the highest annual earnings total since 2006, when insured institutions reported $145.2 billion in net income. The year-over-year improvement was made possible by large reductions in provisions for loan and lease losses, reflecting an improving trend in credit quality. The improvement in earnings was fairly widespread; more than two out of every three insured institutions – 66.9 percent – reported higher net income than in 2010. Fewer than one in seven institutions – 15.5 percent – reported a net loss for the year, the lowest proportion since 2007. Reduced loss provisioning expenses made up for a year-over-year decline in the industry’s revenues. Net operating revenue (the sum of net interest income and total noninterest income) was $12.8 billion lower than in 2010.

The average return on assets (ROA) rose to 0.88 percent from 0.65 percent a year earlier. This is the highest full year ROA for the industry since 2006. More than 59 percent of insured institutions had higher ROAs in 2011 than in 2010. Insured institutions set aside $76.9 billion in provisions for loan and lease losses during 2011, a reduction of $81.1 billion (51.3 percent) compared to 2010. The industry’s total noninterest income declined by $5.3 billion (2.3 percent), as income from asset servicing fell by $8.0 billion (48.6 percent), gains on loan sales dropped by $4.8 billion (43.0 percent), and income from service charges on deposit accounts declined by $2.2 billion (5.9 percent). These declines were partially offset by a $2.2 billion (9.5 percent) increase in trading income. Net interest income was $7.5 billion (1.7 percent) lower than in 2010. Total noninterest expenses were $19.8 billion (5.1 percent) higher.

A problematic interest-rate environment characterized by historically low short-term interest rates contributed to a decline in the industry’s net interest margin. The average margin fell from 3.76 percent in 2010 to 3.60 percent in 2011. Narrower spreads between the yields on interest-earning assets and the costs of funding those assets combined with weak growth in earning assets to produce the year-over-year decline in net interest income. The greatest margin declines occurred at the largest banks, where much of the growth in interest-earning assets consisted of low-yield investments, such as balances with Federal Reserve banks.

An improving trend in asset quality indicators that began in the second half of 2010 continued through the end of 2011. For the twelve months ended December 31, total noncurrent loans and leases – those that were 90 days or more past due or in nonaccrual status – fell by $53.5 billion (14.9 percent). All major loan categories registered improvements, with loans secured by real estate properties accounting for more than two-thirds (68 percent) of the total decline in noncurrent loan balances. Noncurrent real estate construction and development loans declined by $19.3 billion, while balances of loans to commercial and industrial (C&I) borrowers that were noncurrent fell by $11.7 billion. Noncurrent real estate loans secured by nonfarm nonresidential properties declined by $6.1 billion, and noncurrent residential mortgage balances dropped by $5.6 billion. Net charge-offs of loans and leases (NCOs) totaled $113.0 billion in 2011, a $74.7 billion decline from 2010. This is the fourth consecutive year that industry charge-offs exceeded $100 billion. Credit card loan NCOs had the largest year-over-year decline, falling by $27.9 billion. NCOs of real estate construction loans were $11.8 billion lower, C&I NCOs were down by $9.8 billion, and residential mortgage NCOs fell by $8.3 billion. At the end of 2011, there were 813 institutions on the FDIC’s “Problem List,” down from 884 “problem” institutions at the beginning of the year.

Asset growth picked up in 2011, funded by strong deposit inflows. During the 12 months ended December 31, total assets of insured institutions increased by $564.4 billion (4.2 percent). Cash and balances due from depository institutions (including balances with Federal Reserve banks) accounted for $298.4 billion (52.9 percent) of the growth in assets. Securities portfolios rose by $182.6 billion (6.8 percent). Net loans and leases increased by $130.8 billion, as C&I loan balances rose by $160.9 billion (13.6 percent). Balances fell in most other major loan categories in 2011. The largest declines occurred in real estate construction and development loans, where balances fell by $81.4 billion (25.3 percent), and in home equity lines of credit, which declined by $33.5 billion (5.3 percent). Banks reduced their reserves for loan losses by $40.5 billion (17.5 percent) during 2011, while increasing their equity capital by $68.0 billion (4.6 percent).

Growth in deposits outpaced the increase in total assets in 2011. Deposits in domestic offices of insured institutions increased by $881.9 billion (11.2 percent), while deposits in foreign offices fell by $121.4 billion (7.8 percent). A large portion of the increase in domestic deposits occurred in noninterest-bearing transaction accounts with balances greater than $250,000 that are fully insured until the end of 2012. Balances in these accounts increased by $569.1 billion (56 percent) during the year. Nondeposit liabilities fell by $255.6 billion (10.7 percent), as banks reduced their Federal Home Loan Bank advances by $59.1 billion (15.3 percent), Fed funds purchased declined by $72.5 billion (60.9 percent), securities sold under repurchase agreements dropped by $30.3 billion (6.6 percent), and other secured borrowings fell by $76.4 billion (19.6 percent).